Outsourcing Performance Measurement


The Client entered into an outsourcing agreement with a Vendor for provision of its data center, and voice and data communications services. Technology and Business Integrators, Inc. (TBI) served as a strategic management consultant to the Client, analyzing outsourcing options and assisting in contract development and negotiation, with the aim of insuring an agreement consistent with the company’s corporate strategy and goals. As part of their service, TBI assisted the Client in crafting and implementing performance measurement to insure that outsourced services would meet their business needs.

The IT outsourcing was a part of a broader strategic alliance between the two companies. The joint aim of the firms was to strengthen their positions in the market as providers of information technology and services in the insurance industry. Their alliance aimed to capitalize on the Client’s strengths in marketing insurance and financial industry software and on the Vendor’s strengths in providing information technology services. The expected benefit for the Client was lowered IT costs which would enable them to offer on-going business process outsourcing services to their clients at competitive rates. The Vendor, on the other hand, gained a midrange and mainframe data processing facility that could be used to service other clients and enhanced access to the financial service company market.

Problem Summary

The Client management wanted a means of insuring that IT services they contracted for were provided by the Vendor at equal or higher levels to those that they could provide to their (external and internal) clients themselves. They also wanted to ensure that data center pricing remained competitive throughout the contract term. The challenges faced here were: 1) setting service level standards in the absence of baseline performance data 2) implementing customer satisfaction measurement in a manner that would provide a valid supplement to service level metrics; and 3) selecting/devising a valid benchmarking process for competitive analysis of cost and performance.

During the due diligence period prior to contract signing, TBI worked with the Client management to craft performance measurement contract terms that could help the Client and the Vendor monitor how well the objectives of the outsourcing action are being met, over the life of the contract. Three different performance measurement concepts were introduced: 1) service level metrics focused on availability, responsiveness, reliability, quality, etc. of IT services; 2) surveys of customers with regard to satisfaction with vendor services; and 3) periodic external benchmarking of data center cost and performance.

All parties recognized that the specifics of the contractual agreement with regard to performance measurement were not as important as ensuring: 1) that there was a process by which performance would regularly be monitored and discussed; and 2) that there were contract terms to motivate improved performance over time.

TBI’s Approach

Service Levels: Prior to contract signing, a draft list of service levels was developed and preliminary distinctions were made between those that were considered “critical” to the Client software development, BPO and ITO business management and those that were merely of informational value. A performance credit process (in which the Vendor would pay defined
amounts to the Client) was specified in the event that service provided by the Vendor repeatedly fell below standard for a critical service level.

Default standards were also established for each of the listed service levels (e.g., MVS availability equal to or greater than 99.98% of scheduled time; 90% of phones installed for new employees within 1 day of request). Defaults were based on knowledge of industry performance levels and/or the Client business management’s stated requirements. They were not intended to be binding, only to provide a fallback position in the event that better information could not be gained to permit setting of standards at different values or in the event that the Client and the Vendor did not agree to a standard.

In the year following contract signing, TBI led a series of meetings with the Client and the Vendor to finalize metrics definitions and methods of measurement and calculation, and plans to develop baseline data for each. As the Vendor completed baseline studies, TBI analyzed results, developed recommendations on appropriate service level standards, and worked with the the Client Program Office to develop strategies for negotiation of these standards with the Vendor. The Vendor, the Client and TBI then participated in negotiations of service level standards. Once negotiated, these were presented to the the Client Advisory Committee for approval.


Prior to contract signing, the right of the Client to periodically benchmark the Vendor data center price performance against industry averages was defined. The goals for this benchmarking and process by which results would be examined were also set forth.

After contract signing, with the Vendor and the Client assistance, TBI conducted a baseline benchmarking of the data center for the year period prior to outsourcing, using its standardized industry benchmarking process. The process yielded a full report of the position of the data center compared to industry average and best practices in terms of cost, productivity and performance for a data center of like size and type. These data were used to help set service level standards and to establish the baseline cost % difference from industry average to be used in future data center cost comparisons.

A series of meetings were also facilitated by TBI on the results of the first contract year competitive price benchmarking and the method to be used to do this in future years. A format for the periodic price benchmarking was defined and data elements and sources were documented by TBI.

Customer Satisfaction:

Prior to contract award, TBI prepared recommendations for form and content of customer satisfaction surveys. This included noting different customer audiences (e.g., software development personnel, management, marketing personnel, etc.) and the attributes of service satisfaction (e.g., cost/benefit, responsiveness, etc.) appropriate for each customer group to evaluate.

Following contract award, TBI led discussions with the Client and the Vendor on the content, method and pattern for survey distribution. The Vendor developed a survey form and employed this to conduct a baseline study of data center customer satisfaction in the 6 month period prior to outsourcing. TBI assisted with analysis of the baseline results. TBI also developed recommendations for improvement of the survey form and method. The revised customer satisfaction survey employed by the Vendor in Spring 1999 achieved an improved survey response rate over the baseline study and yielded data in a format capable of showing specific customer satisfaction trends over time.

Program Office:

Prior to contract award, TBI assisted in defining the role of the program office with regard to outsourced service performance measurement monitoring and evaluation.

After contract award, TBI assisted the Client in defining particular jobs and responsibilities and justifying additional staffing to manage the workload effectively. TBI also helped to develop a Program Office annual calendar. The calendar noted timeframes and due dates for annual reviews of metrics and standards, time sensitive decisions on benchmarking, actions needed to support periodic customer satisfaction benchmarking, and other process and reporting responsibilities.

Successful Business Solutions

Pre-contract deliverables received by the client:

  • A service level exhibit to the contract that included:
  • Overall objective of the service level agreement and expectations for required changes in service levels during the term of the contract
  • The Vendor and the Client roles and responsibilities for measurement, monitoring, action planning, adjusting performance metrics, and resolving disagreements
  • Process for establishment of specific service level objectives
  • Draft list of the service levels to be tracked and reported, with “default” standards
  • Description of how performance credits will be paid to the Client in the event that certain critical service levels are not met for a sustained period of time
  • An exhibit to the contract describing the content and scope of the customer satisfaction survey that the Vendor is required to administer
  • Contract terms permitting the Client to periodically benchmark price and performance against industry data
  • Requiring the Vendor to conduct a baseline customer satisfaction survey during the transition period and periodically throughout the contract term

Post-contract deliverables received by the client:

  • Guidance on Program Office structure, process and hiring needs
  • On-the job training of Program Office personnel in performance metrics concepts and process
  • Analyses of alternatives for and specification of each service level metric to be reported, including definition of the method of calculation, measurement periods and source of data • Analysis of baseline studies and recommendations to the Client for service level standards (including recommendations to drop or modify draft service levels and/or metrics as appropriate)
  • Assistance in preparing a the Client audit script for critical service level metrics
  • A finalized set of critical and non-critical service level metrics to be reported on weekly, A finalized set of negotiated performance standards
  • A baseline benchmarking analysis of the data center cost, productivity and performance in the year prior to outsourcing
  • A standardized method for periodically benchmarking data center cost against industry average
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